The euro is already an important global currency, while the US dollar retains a clear lead in international use. Europe’s top monetary official says the currency can gain ground, but only if three deep weaknesses are addressed. Christine Lagarde, President of the European Central Bank, has urged action on geopolitical credibility, economic strength and legal and institutional reform. The call ties to long-standing structural issues flagged by economic researchers after 25 years of the single currency.
Where the euro stands
The euro is already the world’s second most-used currency. It accounts for roughly 20% of global reserves. The US dollar remains dominant at about 58%.
That gap matters. A stronger international role would lower borrowing costs for euro-area borrowers. It would cut exposure to sudden currency swings. And it would make Europe less vulnerable to coercive measures tied to a rival currency.
Those aren't abstract benefits. The European Central Bank links them to jobs and trade. The ECB has warned that Europe’s open trading links support some 30 million jobs. Lagarde has said the euro’s wider use could bring tangible economic gains.
Lagarde’s three pillars
In a June 2025 blog, Christine Lagarde set out three pillars the euro needs. She named geopolitical credibility, economic resilience and legal and institutional integrity. She said the currency won’t rise by default.
It must be earned.
Geopolitical credibility, she argued, rests on Europe’s role in trade. The EU is the leading trading partner for dozens of countries and accounts for a large share of global GDP. The euro already invoices about 40% of trade where the EU is the partner, giving Europe a starting advantage.
On the economic pillar, Lagarde pointed to what successful international issuers usually offer: steady growth, deep liquid markets and a supply of safe assets. She said Europe needs to do more on each count. Monetary policy alone can’t deliver that stronger economic base.
The third pillar is legal and institutional. Real confidence, she wrote, rests on hard facts. Investors favour regions that honour their alliances. The ECB noted that such guarantees can raise a currency’s share in reserves by up to 30 percentage points. And that, according to the ECB, helps ensure liquidity abroad. To avert shortages, the bank extends swap and repo lines to key partners.
Structural baggage from the past
Long-run weaknesses are no secret. A CEPR review of the euro’s first 25 years divides the history into four phases. The first phase ran from 1999 to 2008 and was marked by optimism and misplaced capital. From 2008 to 2019, crises and fragmentation exposed deep imbalances. The pandemic prompted a partial institutional response. Since 2022, policy trade-offs returned as inflation rose and central banks tightened.
CEPR researchers Marco Buti and Andrea Corsetti point to misallocation in the early years. Capital moved inside the euro area. But it often went to non-tradable sectors such as real estate. It flowed through short-term bank loans rather than long-term market finance. That created domestic vulnerabilities and divergent economic paths across member states.
The Great Financial Crisis revealed those weak spots. What began with fiscal trouble in one country became a wider trust problem. Banks and governments found themselves exposed in different ways. Trust between member states frayed, and policy gaps became apparent.
Internal barriers and the capital gap
Lagarde has pressed a sharper point on internal barriers inside the EU. In an interview in December 2025, she said EU rules are often followed by national add-ons. She called the result "self-inflicted tariffs" that raise the cost of moving goods and services between member states.
The ECB provided figures to make the point. It estimates internal trade barriers amount to an effective tariff of 110% on services traded across borders within the EU and about 60% on goods. "We are constraining the traffic of goods and services among member states which are supposed to be a single market," Lagarde said in the interview.
Those barriers feed reluctance among investors and firms to scale up across the single market. At the same time, a lack of deep, integrated capital markets pushes European savers and start-ups to look elsewhere for financing. Lagarde called for a genuine Capital Markets Union so innovators can access growth funding inside Europe rather than relying on external investors.
The ECB’s prescriptions span policy tools and politics. On geopolitics, Lagarde wants Europe to rebuild hard power and credible alliances. That, she argues, will signal to global investors that Europe can stand by its partners and contracts.
On the economic front, policy makers must lift growth and deepen markets. CEPR’s history shows that past monetary and fiscal settings encouraged short-term lending and undercut reform, letting structural divergence grow. The recovery from the pandemic introduced new joint tools, but the underlying market structures remain incomplete.
On institutions, the task is legal clarity and predictable enforcement. The ECB says hard facts build confidence. Investors move when legal frameworks and institutions reduce uncertainty. Swap and repo lines are one practical backstop. But they’re a complement, not a substitute, for deeper market reform.
If those gaps persist, the euro risks stagnating as a global alternative. Europe would keep paying a premium in borrowing costs and face higher exposure to exchange-rate swings. Firms would keep seeking finance abroad. Savings would continue to flow out of the region into deeper markets.
CEPR’s account of the euro’s history shows how incomplete architecture can store up problems. Misplaced capital and banking weaknesses magnified stress during crises. Those lessons frame Lagarde’s urgency: institutional fixes and market integration aren’t optional add-ons. They’re the foundation of monetary influence.
Reforming the single market, building capital markets and strengthening legal frameworks all require political consent. Lagarde named national regulators and EU institutions as part of the problem when they add layers beyond EU rules. She urged the European Commission to act decisively in removing those obstacles.
That is easier said than done. National interests and regulatory cultures differ. Some countries favour stricter standards. Others prioritise local firms or public oversight. Reconciling those differences will take negotiation and compromise. The ECB can press the case. But actual change depends on member states and the Commission agreeing on concrete measures.
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"We are quite close to potential, but there’s a lot to be done," Christine Lagarde, President of the European Central Bank, said.
This article was created with AI assistance.
